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1、Chapter 10,Bond Basics,WHAT IS A BOND?,A bond is a debt security,similar to an I.O.U.When you purchase a bond,you are lending money to a government,municipality,corporation,federal agency or other entity known as the issuer.IssuerCoupon rate（interest rate）Face value/par value(principal)MaturityPrice
2、,Classification of bonds,Bonds are often classified according to the type of issuer.treasury bonds agency bonds municipal bonds corporate bonds,Table 1 Bond Ratings by Moodys,Standard and Poors,and Fitch,Junk Bonds:Everything You Need To Know,Fluctuations in Bond Prices-Different in Coupons and Equa
3、l Maturity Dates,Words and Expressions:,face valuepar valuecouponmaturityrisk-free assetsrisk/return tradeoffcredit ratingblue-chip firms,junk bondyield to maturityliquidity risk call riskgovernment bondsmunicipal bondscorporate bonds,Future Value,Future Value is the value on some future date of an
4、investment made today.,Future Value,$100+$100(0.05)=$105PV+Interest=FVPV+PV*i=FVPV=Present ValueFV=Future Value i=interest rate(as a percentage),Future Value,Future Value in one year.FV=PV*(1+i),Future Value,Future Value in two years100(1+0.05)(1+0.05)=$110.25,FV at the end of one year,Future Value,
5、Compound interest:interest on the interestGeneral Formula Future value of an investment of PV in n years at interest rate i(measured as a decimal,or 5%=0.05)FVn=PV*(1+i)n,Future Value,Computing Future Value at 5%Annual Interest,Present Value,A dollar paid to you one year from now is less valuable th
6、an a dollar paid to you todayWe need to figure out how much a payment promised in the future is worth today.Say you agree to make a&225 loan,and the borrower offers to repay you either$100 a year for 3 years or$125 a year for 2 years.Which offer should you take?,Present Value,Present Value(PV)is the
7、 value today(in the present)of a payment that is promised to be made in the future.ORPresent Value is the amount that must be invested today in order to realize a specific amount on a given future date.,Present Value,Present Value of an amount received in one year.Solving the Future Value EquationFV
8、=PV*(1+i),Present Value,Example:$100 received in one year,i=5%PV=$100/(1+.05)=$95.24Note:FV=PV*(1+i)=$95.24*(1.05)=$100,Present Value,Present Value of$100 received n years in the future:,Present Value,ExamplePresent Value of$100 received in 30 months and an annual interest rate of 8%.PV=$100/(1.08)2
9、.5=$82.50Note:FV=$82.50*(1.08)2.5=$100,Present Value,Important Properties of Present ValuePresent Value is higher:1.The higher the future value(FV)of the payment.2.The shorter the time period until payment.(n)3.The lower the interest rate.(i),Coupon bond,A coupon bond pays the owner a fixed interest
10、 payment(coupon payment)every year until the maturity date,when a specified final amount(face value or par value)is repaid.Three pieces of information:-the issuer of the bond-The maturity date-Coupon rate:as a percentage of the face valueTreasury bonds and notes;corporate bonds,Coupon bond,Discount
11、bond,A discount bond(also called a zero-coupon bond)is bought at a price below its face value(at a discount),and the face value is repaid at the maturity date.Treasury bills;savings bonds;long-term zero-coupon bonds,Discount bond,Yield to Maturity,The interest rate that equates the present value of
12、cash flow payments received from an investment with its value today.,Coupon BondYield to Maturity,When the coupon bond is priced at its face value,the yield to maturity equals the coupon rateThe price of a coupon bond and the yield to maturity are negatively relatedThe yield to maturity is greater than the coupon rate when the bond price is below its face value,Discount Bond,
